Why Gold, Silver Prices Could Dive in a Flash

Kimberly Watson, Editor in Chief
October 01, 2012 /

Gold and silver prices dipped Friday as the dollar strengthened against global currencies on safe-haven buying that followed disappointing U.S. consumer sentiment and purchasing managers data. An economist warns a recession could lead to a meltdown in precious metals despite all the bullishness from global stimulus programs.

Spot gold prices shed 0.23% to $1774 an ounce intraday. During the quarter, it reached its highest price of 2012 and came within six percentage points of its all-time nominal high from 12 months ago.

This month Prestige Economics of Austin, Texas, raised its 2012 price target on the yellow metal to $1,684 an ounce from $1,649 per ounce. It also raised its 2013 target to $1,900 from $1,750 an ounce.

“The introduction of the European Central Bank’s Outright Monetary Transactions (OMT) and the implementation of the Federal Reserve’s quantitative easing ad infinitum greatly improved the prospects that our forecast of dollar weakness will come to fruition at a swift pace,” Jason Schenker, president of Prestige wrote in his latest monthly outlook released Friday. “The downside risks to gold prices have been greatly reduced now that the Fed is on an endless buying spree of mortgage-backed securities (MBS).”

Gold prices are rising on expectations that central banks pumping up global money supply will spark inflation. The U.S. and European stimulus programs led to a domino effect at central banks around the world.
Japan and China have started their quantitative easing. India and Brazil lowered interest rates to spur growth. Singapore says it’s ready to take action if needed.

“We have a global currency war where everyone is trying to devalue their currencies. In that case the only real currency is gold or silver,” said Matthew Tuttle of Tuttle Wealth Management in Stamford, Conn. with about $100 million in assets.

Central banks in Russia, China, India and other countries are buying gold to diversify their reserves. Political conflict, such as that between China and Japan and in the Middle East, has also traditionally been positive for gold.

Why Gold Could Lose Its Luster

The Fed’s newly created trillions are parked in bond portfolios at banks instead of being lent out as intended, says John Browne, senior economic consultant to Euro Pacific Capital in Westport, Conn. The newly printed money isn’t fueling inflation as gold buyers expect. And if the U.S. goes into a recession, gold investors may sell their gold to raise cash and meet margin calls ignited by falling stock prices.

“In recessions, cash becomes increasingly scarce and real assets, including commodities, fall in price,” Browne wrote in a client note. “As a commodity, gold should fall in price as recession becomes manifest.”

“The possibility is rising of a worldwide recession, which normally tends to push down asset prices, particularly for stocks dependent on corporate earnings,” he added.

PowerShares DB US Dollar Index Bullish ( UUP ), measuring the dollar against a basket of foreign currencies, rose inched up 0.39% to 21.90 Friday. It shed 1.8% in September and fell 2.5% for third quarter.

SPDR Gold Shares ( GLD ) shed 0.69% to 171.64 Friday. It climbed 4.5% in September and 10.6% for the quarter.
Market Vectors Gold Miners ETF ( GDX ) fell 0.20% to 53.68. GDX surged 12% in September and 20% in Q3.

Silver Prices

Spot silver prices fell 0.38% to $34.63 an ounce.

Schenker projects silver prices will average $31 an ounce in 2012 and $34.50 in 2013.

IShares Silver Trust ( SLV ) gave back 0.28% to 33.30 on Friday. It added 8.2% for the month and a robust 25% for the quarter.

Global X Silver Miners ETF ( SIL ) let up 0.14% to 24.93. SIL returned 16.3% in September and a whopping 34% in the third quarter.

Mutual funds specializing in gold and precious metals absorbed more than 90% of the $1.6 billion that flowed into commodity sector funds last week on fears that global stimulus programs will erode the value of fiat currencies, according to EPFR Global.

Economic Releases

The Institute for Supply Management-Chicago said its business barometer fell to 49.7 from 53 in August. Economists expected a reading of 52.8. It dropped for the first time in three years, signaling contraction. Readings below 50 mean contraction, and readings above it mean expansion.

The Thomson Reuters/University of Michigan Consumer Sentiment Index rose to 78.3 this month from 74.3 in August. Economists projected a reading of 79.


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